Optimal Monetary Policy in a Dynamic Stochastic General Equilibrium Model in an Islamic Framework

This paper is aimed to design a Dynamic Stochastic General Equilibrium in an Islamic framework for Iran. For this purpose an Islamic policy instrument, i.e. The share of government participation in capital funding (MUSHARAKA) is substitute for the interest rate. Then an Islamic policy rule is substitute for Tailor rules in which MUSHARAKA rate will respond to GDP and inflation fluctuations. The results reveal that with the new policy rules, the impact of economic shocks on both GDP and inflation fluctuation will decrease. Then the optimal Islamic(MUSHARAKA) rule is derived. The coefficients of optimal policy rules indicate that monetary authority should respond equally to inflation and the GDP gaps. Therefore, we can conclude that the instrument introduced in this model is quite capable to confront economic fluctuations .So it can be used as an alternative superior instrument for implementing the stabilization policies.